Revisiting Personal Guarantees

There are a surprising number of cases dealing with whether people who purportedly signed a personal guarantee actually agreed to personally guarantee a contract.

Many of the issues I’ve seen arise when someone signs at the bottom of a contract as “guarantor” rather than signing a separate guarantee document. There’s nothing wrong with doing that, but it can cause issues. For example, I discussed a case in 2012 involving a corporate officer who signed a credit application that contained guarantee language. The officer signed the document only once, the signature did not indicate whether he was signing in his individual capacity or on behalf of the company, there was only one signature line, and the guarantee language did not clearly evidence that a personal guarantee was intended. The court held that the officer had not agreed to personally guarantee the company’s obligations and stated:

When considering whether a signatory to a contract intended to sign the agreement in his corporate or individual capacity, the determinative question is whether, in view of the form of the signature to the agreement, the language of the so called guaranty clause is sufficient to manifest a clear and explicit intent by [the signatory] to assume a personal guaranty contract. … Accordingly, our courts have adopted the policy that in order to hold a corporate officer individually liable in signing a contract of guaranty … the officer should sign the contract twice[,] once in his corporate capacity and once in his individual capacity…. By signing the contract twice, the officer executing the contract for his corporation clearly manifests his intent to assume personal liability. [citations and internal quotation marks omitted]

Drafters should clearly indicate that persons signing guarantees in contracts are signing in their individual capacities and they should include a separate signature block for them the sign in that capacity.

Phillips v. Missouri TLC, LLC

In a more recent case, the purported guarantors who signed a promissory note under the words “Personal Guaranty and Acceptance of Terms” contended that they hadn’t agreed to personally guarantee the note. They argued that the guarantee language was not sufficient and that the guarantee agreement wasn’t supported by consideration.

On appeal, the Missouri Court of Appeals, Southern District rejected both arguments and upheld the personal guarantees.

The purported guarantors argued that a personal guarantee should resemble the one examined in an earlier Missouri appellate case, which stated “I personally guarantee to you … and I hereby bind myself to pay to you on demand any sum which may become due to you by my firm whenever the firm shall fail to pay the same.” The appeals court rejected the notion, noting that the mere word “guarantee” could be sufficient to evidence the intent of a person to personally guarantee the debt.

On the issue of consideration, the appeals court noted that guarantee agreements are separate contracts, which must be supported by consideration. However, a “guaranty executed contemporaneously with the execution of a promissory note may be considered a part of the original note transaction and supported by the same consideration.” That was the case here, and the personal guarantees were clearly supported by consideration.

One other issue that the appeals court addressed was whether two of the purported guarantors (spouses of the owners of the borrower) had enough involvement in the borrower’s business to support a personal guarantee, a position the trial court had adopted in ruling that the spouses hadn’t personally guaranteed the note. The appeals court rejected the reasoning, stating that the spouses did not have to participate in the borrower’s business to be held personally liable on the loan.

Tips for drafters

Although the personal guarantees were upheld in this case, drafters can decrease the chances of litigation by following a few tips:

If a person is signing a contract both in his or her capacity as an agent of a company and in his or her individual capacity as a guarantor, they should sign the document twice with guarantee language and signature blocks that clearly show those different roles.

Since a personal guarantee is a separate agreement — even if it is found at the bottom of a contract — drafters should use language that clearly shows that the individuals intend to personally guarantee the company’s obligations.

Also, drafters should always think about whether the guarantee is supported by consideration. When the guarantee is signed contemporaneously with the underlying contract, the question of consideration may be clear, but if the guarantee is signed separately — and especially if it is signed later — you should think through the issue of consideration. (See my post Have You Thought about Consideration?)

Perhaps our astute readers have other tips they’d be willing to share.